Flexonomics

In a dynamic labor market, challenged by technological disruption and increasing longevity, flexibility is key

April 01, 2017
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Written By: Ilan Evyatar

The late Israeli President Shimon Peres meets the humanoid robot, "Hubo," during his visit to the Korea Advanced Institute of Science and Technology (KAIST) in Daejeon, South Korea.

We live in a rapidly changing world.

A world where longevity is increasing, requiring us to work for many more years; a world where we will have to change careers frequently and to constantly acquire new skills; a world where we will have to compete in a global marketplace and where technology and automation create perpetual disruption and threaten to take over our jobs.

It is a reality that creates both challenges and opportunities, but also one that markets must be prepared for in order to be able to compete, thrive and prosper, and to enable all sectors of society to participate.

The Israel Democracy Institute’s Center for Governance and the Economy is tackling the challenges this brave new world poses to Israeli society, and has brought together a task-force with representatives from across government ministries, the business sector, labor unions and academia – in fact anyone involved in or researching the field.

“Our aim was first of all to bring together all the relevant parties, to collect all the available knowledge, to see what direction things can be expected to go and how we can prepare for and adapt ourselves to these developments,” says the Center’s director Daphna Aviram-Nitzan.

According to Aviram-Nitzan, the labor market is already out of sync with the needs of both employers and workers, with every element, from labor laws to training, outdated and in need of reform.

Aviram-Nitzan explains that what IDI, as a neutral body, aims to do is sit around the table with these variant parties and create a strategic vision for the future of the labor market.

“If we don’t come up with models for the future,” she says, “it will be a threat to the stability of the regime and democracy.”

One of the issues the project is focused on is labor reforms aimed at creating conditions that will on the one hand enable employers greater flexibility to compete in dynamic markets, yet at the same time create security for workers, who will need retraining and a social safety net as they transition between jobs.

If the education system is better, then people have better skills and are better equipped to deal with a changing labor market.Prof. Yotam Margalit

In order to understand the reforms required, the Center set out to map the labor market and understand its current status.

Prof. Yotam Margalit, a political economist who co-directs the Center’s Labor Market Reform program, says that one of the things they are seeing is a growing increase in the divide between educated and non-educated workers.

The labor market, he explains, can be divided into insiders and outsiders – insiders being those who are, for example, protected by union coverage – and then subdivided into educated and uneducated workers. It is those who are “uneducated outsiders” that are the most vulnerable members of society and in need of protection, Margalit explains.

“In reforming the labor market,” says Margalit, “we need to think how we improve the prospects of all workers, but particularly of those low-skilled outsiders.”

One of the ways of doing that, he says, is by investing in what is known as Active Labor Market Policies (ALMP), government programs to intervene in the labor market by providing retraining schemes, employment subsidies and help finding jobs. Israel however currently spends only about a third of the OECD average on such programs.

“Those programs are a major way to help low-skilled outsiders, because they are the ones who tend to find themselves searching for new jobs, as their jobs tend to be less secure,” says Margalit.

But he also notes that on the other side of the coin, “We need to think about how to maintain a productive and agile economy and that means there should be some package deal that would entail increased flexibility for employers on the one hand, but would also increase job prospects or security for workers, on the other.”

Better security, Margalit explains does not mean clinging to jobs, but rather creating a system that provides workers with better opportunities for training and finding new jobs, while giving them greater protection and a stronger social safety net for the period when they are looking for a job.

He says that Israel needs to adopt a higher net replacement rate (NRR), the term used for comparing how much an unemployed worker receives when compared to their last salary.

“If you provide people with a higher NRR then you are giving them better opportunities to find a new job, and secondly, if you do lose your job, it isn’t the end of the world as you are not broke or struggling. Such a system would enable workers to live with the idea of greater flexibility, which could mean not just firing workers, but sometimes shifting workers from one unit to another or reducing them for a period of time to less than full employment.”

Another area where Margalit points out a need for a major improvement is the education system.

“We have to improve the system so that we don’t have to rely on people having to catch up later in life,” he says. “If the education system is better, then people have better skills and are better equipped to deal with a changing labor market.”

Prof. Eytan Sheshinski, who recently joined the Center as a senior researcher, explains that pensions are being dramatically affected by market dynamics and all the more so as a result of the increase in longevity.

Sheshinski, who headed the commission that created the eponymous Sheshinski laws on taxation of natural resources, is also an expert on pension design and has worked with several foreign governments.

“Longevity is a paradox,” Sheshinski says. “On the one hand, life expectancy rises, but on the other, the pensions blanket is too short.”

Sheshinksi’s current IDI research looks at how to “balance” the system to protect weaker groups in society. Pensions today, unlike in the past, depend on accumulation, he explains and that puts people with a lower participation rate in the labor market and those who find themselves having to change jobs frequently at a disadvantage.

Women for example tend to work less and retire earlier than men so they have lower accumulation.

Furthermore, longevity increases disproportionately for the rich because life is extended today by costly medicinal means and therefore people at a higher end of the income scale are living longer. So with a uniform conversion rate (the factor by which the sum of accumulation is converted into an annual retirement benefit based on life expectancy and mortality rates), the poor are subsidizing the rich who get a pension for more years.

As for the problem of transitional unemployment, Sheshinski says that with an increase in the mobility of labor, the government should fill the gap by maintaining worker’s pension rights for a limited period of time when they are between jobs. He supports use of interest and capital gains, but not principal, from the sovereign wealth fund created by the Sheshinski laws on excess profits on natural resources, to beef up pensions.

Perhaps the hottest topic today, when it comes to the debate on the labor market, is automation and the threat that machines and artificial intelligence will take over our jobs.

“Automation is part of the reality that workers face,” says Margalit. “On the one hand, some jobs are becoming redundant, but, on the other, automation is creating new jobs. The jobs robots will do in the future will require people to operate them.

There will be new jobs of which we are currently unaware.”

Sheshinski says there are more pressing concerns than robots.

“I don’t believe in the theory of a fixed amount of jobs available, people can move into service industries, education, etc.,” he says. “The economy is resilient. I don’t believe robots will replace people. Robots will do some jobs and people will find other forms of employment.